Recently it seems like many entrepreneurs are simultaneously running funds and companies: Andy Dunn of Bonobos runs Red Swan Ventures, Bryan Johnson of BrainTree and Kernel runs OS Fund, Andrew Ng of Coursera and Landing.ai is building AiFund, Naval Ravikant runs AngelList and invests in startups through the platform, even Jeff Bezos of Amazon has Bezos Expeditions. A lot of entrepreneurs swear that being an operator in a previous life helps current VCs be better VCs and empathize with founders; but the logical next question is does being a VC in the past or concurrently help you be a better entrepreneur? And does running a fund while running a company build on each other and increase the probability that the other is successful?
When my cofounder and I were starting Prototype Capital after exiting a company in the past, as product founders we wanted to continue building products in the trenches as founders; but we also realized that building a venture firm would allow us to be part of the simultaneous technology revolutions happening from AI and robotics to genomics to VR, rather than just watching from the sidelines. And thus we started Prototype Capital, a distributed VC studio with scouts all over the country sourcing deals and investing in founders using exponential technologies to build lasting businesses.
Initially, the most obvious thing we realized is how different of a perspective VCs have compared to entrepreneurs (even though it seems like the two are quite similar). An entrepreneur’s job is to have a vision, execute on it, and then never give up no matter what happens; entrepreneurs have to be irrationally optimistic and believe in themselves like no other.
As VCs however, our job is to look at the “best possible outcome of a company” and to find the “black swans” as Nassim Nicholas Taleb calls them, the unknown unknown—the ideas and companies that are unpredictable and come out of nowhere and yet fundamentally change everything. In other words, our job is to predict the unpredictable, which is impossible, and so we settle for simple heuristics that have historically produced winners: is the founder going to give up; can the team engineer the product; have they figured out what they’re selling; have they figured out who their customer is; is there evidence that the customer wants their product; is it a second time founder; are there macro trends in the world that with some confidence point to the founder’s fundamental truth being true; and if in the small probability the founders are right, can the carried interest from that one company return our entire fund over? In other words, because of the impossibility of the task of predicting the future (and then being fooled by randomness when we’ve done it!), we inevitably—even if we try not to—end up pattern matching and looking for what may go wrong rather than what could go right (exactly the opposite as entrepreneurs). Just being on the other side of the table and really understanding how VCs work and think, what they look for, and how their economics worked has been vital in raising outside capital for our studio companies, helping portfolio companies raise money from other investors, and even continue raising for our next fund for Prototype.
Moreover, this perspective of the other side of the table taught us how to objectively look at businesses. As an entrepreneur, sheer optimism and virulent belief in your vision intrinsically leads you to overvalue your work (as uber-psychologists Daniel Kahneman and Amos Tversky have shown, we’re extremely overconfident in our beliefs as a species). But as VCs, our fiduciary duty is to, say, 5x our assets under management as a return to our limited partners and thus it’s vital to learn to objectively “value” a business, see past the noise of press, look at the true metrics (as opposed to the vanity metrics) and ask the question “even though it’s a very risky proposition, is the opportunity and growth of the company big enough and the team right that taking the bet is worth it?” Being rooted in reality and truthand not deluding yourself) in terms of financial and growth metrics while building a company has been vitally important to us as entrepreneurs since we can be honest with ourselves when the situation isn’t ideal and correct it.
More generally, one of the major benefits of venture capital is simply that you’re able to see more and just learn from osmosis what works and doesn’t work. Consider an arbitrary entrepreneur who makes a reasonable three important decisions a day; over one year, this leads to 3^365 possible decision pathways—or one with 174 zeros after it. There are an innumerable number of ways possible ways that things could go wrong but only a few “correct” (or reasonably correct) ways; by studying different case studies across portfolio companies playing in various industries, over time you can extrapolate from successes to learn about what works when hiring someone, finding the right investor fit, firing someone, or even choosing the engineering stack. And simultaneously, as an entrepreneur, once you’ve made those mistakes yourself or learned from others’ mistakes, you can prevent current portfolio founders from making those same mistakes.
But perhaps the most important takeaway from VC for entrepreneurs is the idea of “figuring out what opportunities to put time and money into to make more money” (aka finance). This, of course, is the core of venture capital (even early stage, it’s just you’re betting on founders, not an income statement and growth numbers), but it’s also the core of running a company, especially at a later stage: should I invest resources towards opportunity x or y, should I invest z dollars into this unit or shut it down, should I acquire this company, or even should I hire this person if she’s going with this potential benefit in cost reduction and this monthly cost of having her? All these cases are essentially cases of internal development that are fundamentally anchored in the question of “is this investment worth making” and VC has played a defining role in helping me make these decisions.
So do you want to work with or invest in an entrepreneur who was a VC in his past life? Is it worth starting your own fund as an entrepreneur? In many regards, even though it may not seem like it, VCs—who are technically financiers even if they don’t admit it—view the world through quite a different lens than entrepreneurs, who are maniacally focused on product and customers. Still, just as entrepreneurs love to have VCs on their board who are ex-founders, so too does it seems like rather than detracting, being a VC and entrepreneur simultaneously ends up molding you into a better decision maker as a VC and a better operator and strategist as an entrepreneur.